bachelor afleveringsdagen f rdig

8/2/2019 Bachelor Afleveringsdagen F RDIG

1/47

Bachelor Marco Demontis 2011

Strategic valuation of Carlsberg

1

Corporate Valuation


Supervisor

Baran Siyahhan

Author

Marco Demontis300167

Business administration

Aarhus school of business, 2011


2/47



2

1. Initiation.....3

1.1 Problem formulation....3

1.2 Demarcation.3

2. Presentation

2.1 History. ...3

2.2 Share information. ..5

2.3 Markets....5

2.4 Northern & Western Europe. ...6

2.5 Eastern Europe..6

2.6 Asia6

3. Strategic Analysis

3.1 Macro analysis (Pestel) ...8

3.2 Industry analysis(Porters)..12

3.3 Internal analysis(Value chain) ..16

3.4 SWOT matrix.18

4. Financial analysis

4.1 Reformulated income statement....19

4.2 Reformulated balance sheet...20

5. Historical Performance.....21

6. Forecast

6.1 Forecasted income statement....25

6.2 Forecasted balance sheet...31

7. Valuation

7.1 Weighted average cost of capital.33

7.2 Present value of operations (DCF)..367.3 Sensitivity analysis .38

8. Conclusion.38

Bibliography ..41

Appendix overview


3/47



3

1. Initiation

1.1 Problem formulation

Trough a complete analysis of the external and internal factors and looking into the financials of

Carlsberg, the goal is to give an answer if one should invest in Carlsberg or not, considering the

current price of the stock. The problem formulation is therefore;

What is the theoretical value of the Carlsberg B stock, and is it under-/overrated compared to the

current price?

1.2 Demarcation

Through the whole assignment, the market analyzed is the global market. In some parts, the market

is dealt into three regions; Northern Europe, Eastern Europe and Asia. The primary approach in the

assignment will be an analysis of the overall performance, and not on the performance of each of

the markets. Except when analyzing the external factors, there might be some market specific

factors included. Also when forecasting the revenue, the markets are individually looked upon, as

the revenue in the three regions differ a lot.

The market and product covered in this assignment is covered for beer and other Carlsberg products

such as cider is omitted.

The historical performance analysis is covered for the last five years, as it is assumed not to be

necessary going further back. The forecasting period is set to seven years and a terminal year.

2. Presentation

2.1 History

Carlsberg is a big old company, and therefore has a lot of history. It is important to know part of the

history, but a lot of it is also irrelevant for this assignment and therefore omitted. In this section

there will only be a short outline of the information that is important for covering the problem

formulation.

Carlsberg was founded in 1847. Today Carlsberg is one of the biggest breweries, with more than

43.000 employees and products in more than 150 markets, mainly in the three regions; Northern


4/47



4

and Western Europe, Eastern Europe and Asia. With a comprehensive portfolio of beer and other

drinks, Carlsberg is the leading brand worldwide. (Carlsberg, 2009)

In 2000 Carlsberg merged with Orkla, one ofNorways largest listed breweries, which contributed

to Carlsbergs activities in Sweden, Norway & Russia. Apart from now being the market leader in

the four Nordic countries, Carlsberg breweries also held leading positions in a number of other

markets within its geographic areas. In 2004 Carlsberg acquired Orklas 40% shareholding and

therefore it became 100% Carlsberg owned.

In 2008 after 161 years, Carlsberg moved brewing activities from Valby in Copenhagen, to

Fredericia. The new brewery is future proof and expanded to become one of the leading in Europe

in terms of quality and efficiency. The capacity was increased from 2.5 to 4.3 million hectoliters.1

Same year, April 2008, Carlsberg acquired Scottish & Newcastle(S&N), together with Heineken.

S&N was known as the 6th

largest brewery in the world. The brewery activities of S&N was split

between Carlsberg and Heineken. Carlsberg got full control of BBH (the Russian and Baltic

breweries), acquired the French market leader Kronenbourg and the Greek brewery Mythos, and

gained significant shares in Chongqing Brewery Company in China and a new Greenfield brewery

in Vietnam. The take-over of the new activities have made Carlsberg markedly stronger in all

regions and also added important new beer brands to the portfolio.

Carlsberg is now a much larger player in the global brewing industry, and the new platform has

positioned Carlsberg firmly among the worlds largest breweries. The history shows aggressive

expansion, which is consistent with Carlsbergs strategy to become the fastest growing global beer

company and today Carlsbergs strategy is concentrated on the three key focus areas: Northern &

Western Europe, Eastern Europe and Asia. (CarlsbergGroup, 2011)

11 Hectoliter = 100 liter


5/47



5

2.2 Share information

Below is a table with the share information;

2006 2007 2008 2009 2010A shares 33.699.252 33.699.252 33.699.252 33.699.252 33.699.252

B shares 42.579.151 42.579.151 118.857.554 118.857.554 118.857.554

Total shares 76.278.403 76.278.403 152.556.806 152.556.806 152.556.806

share price A ultimo 520 583 192 392 572

share price B ultimo 561 617 171 384 559

Market value equity, DKK mil 41.411 45.918 26.795 58.835 85.658

Table 1: Share information

Note the increase of B shares in 2008, which is due to the emission for financing the acquisition of

Scottish & Newcastle. The stock price and therefore the market value was also significantly reduced

in 2008, due do the economic crisis. In 2009 the B stock price increased 55,5% and in 2010 31,3%

which almost put the stock back to 2007 level. The significant risings are a good sign of high

expectations to Carlsberg from the market.

2.3Markets

Below is a table from the annual report. It is dealt into the three regions, together with the key

numbers; volume, net revenue and operating profit.

Volume, net revenue and operating profit, 2010.

Figure 1: Volume, net revenue and operating profit, source; (Carlsberg, Annual report, 2010)


6/47



6

2.4 North- and Western Europe

Carlsberg is the second largest brewer in this region with leader positions in a large number of

countries and a significant position in others. In this region Carlsberg has some mature beer

markets, but also some less mature in the eastern part. The volume is in general supported by a well

established detail structure and many beer drinking traditions. In the North, the competition is

mainly from local actors and local beer brands, while in Britain and France, bigger companies

compete. As second largest brewery in this region, Carlsberg is the leader in many countries and has

a substantial position in other countries. Carlsberg has approximately 43% of its total sales volume

in this region, and revenue of 36.5 billion DK in 2010.

The operating margin is 11.6% and EBIT margin goal in medium term is 15-17%. The economic

crisis had a negative impact on the beer consumption, but as a general trend, volumes in these

markets are expected to be flat or slightly decreasing. (Carlsberg, Annual report, 2010)

2.5 Eastern Europe

This region includes Russia, Ukraine and some new beer markets. The region is known for its

strong user behavior, with a great interest for brands. The distribution channels are still developing.

A growing middleclass has a positive influence on the beer sale, especially the premium beers.Carlsberg is the largest brewery in the region, with a strong leading position in Russia and the other

countries, except for Ukraine. In Ukraine, Carlsberg has increased the market share and is now

second. Even though its a growing region, the financial crisis had a short term negative effect. Also

the Russian beer market was negatively impacted by the significant duty increase in 2010.

Growth is expected to resume in 2011, with a midterm average growth of 3-5%. The other regions

had a positive growth in 2010 and these are expected to continue.

In Eastern Europe, Carlsberg has approximately 44% sale volume and revenue of 18.5 billion DKK

in 2010. The operating margin is 28.5 % and the EBIT margin goal medium term is 26-29%.

(Carlsberg, Annual report, 2010)

2.6 Asia

In Asia, Carlsberg is again a significant player. This region includes old, mature Carlsberg markets,

but also some new beer markets, among them China and India. The Asian market is characterized


7/47



7

by high density population in cities and a growing economy. The beer consuming is in general low

on the new markets, but is expected to increase drastically in the next years, due to rising disposable

incomes.

Carlsberg has approximately 13% of its sales volume in Asia, and small revenue of 4.2 billion

DKK. The operating margin is 15.8% and EBIT margin goal medium term is 15-20%. (Carlsberg,

Annual report, 2010)

Unfortunately there is not information about Carlsberg acting on the American, Latin American and

African markets. Therefore it is assumed that Carlsbergs positions in these regions are either weak

or not present.

3. Strategic analysis

The purpose of the strategic analysis together with the following financial analysis chapter, is to

assess Carlsbergs earning potential and future growth, which makes the essential part of the

forecasting of the future performance and thereby the valuation of company.

At first there is a Pestel analysis of the external factors that affect the brewing industry. Secondly

the competition in the industry is valued with Porters five forces. Thirdly an internal analysis of the

value chain is made. At last, the results of the three parts are put into a SWOT matrix that sums up

and overall assesses Carlsberg.2

The structure will be as the figure shows:

Figure 2: Strategic analysis structure, source; own made.

2

Since most of the information used in the strategic analysis originates in the annual report, it is important to be criticaltoward the result, as Carlsberg of course want to present itself as good as possible.


8/47



8

3.1 Macro analysis

The Pestel analysis is a macro analysis that goes through each of the important external factors in

detail. The different areas that are looked upon are: political, economic, social, technological,environmental and legal. The political and the legal factor can be hard to distinguish between, but

the political factors are indirect impacts e.g. political proposals. The legal factors are about direct

legislation.

When making the Pestel analysis, the quality of the analysis depends on the chosen factors. In this

case, the chosen factors should be the factors that influence Carlsbergs sale the most. After

choosing each factor, there will be a comment on why the factor it is important.

The Pestel analysis will be made on a company level, and not on each business levels. Though a

business level analysis will give a more exact picture, it will take too much space, and is therefore

omitted. Below is a short table that sums up the Pestel results.

External factors Sub factors Effect on industry

Political Increased focus on health Negative Lower demand Alcohol regulations Negative Less advertising Excises Negative Reduced profit Sales rights +/- Sale opportunity

Economical Exchange rate risk +/- Affects profit Interest rate risk +/- Affects loan costs Cyclical swings in economy Negative Lower demand

Positive Acquisition opportunities

Sociocultural Descending beer trend Negative Lower demand

Technological Modernizing production Positive Efficiency

Environmental Commodity prices +/- Affects production costsNote: +/- indicates, that the effect can be both positive and negative

Figure 3: PESTEL analysis.


9/47



9

Political

Increased focus on public health: An important factor is the increasing focus on the publichealth. This could lead to higher excises on unhealthy products, like alcohol. An excise on

alcohol of course immediately reduces the profit margin, and therefore it is an important

factor. One way to avoid losing profit is to raise the prices. But a rise in prices will affect the

demand negatively, and this is something Carlsberg should be aware of.

Alcohol regulations:In 2012, EUs current alcohol strategy expires, and a new strategy hasto be adopted. The new strategy meeting will be held spring 2012. The Danish EU-

presidency will be leading the meeting and therefore has great influence on the new strategy.

According to Mariann Skar, leader of the European alliance for alcohol policies, the current

strategy is not concrete or strict enough. She wants stricter rules for alcohol, e.g. marketing

regulations, and gives examples of France, where alcohol commercials during sports events

and concerts are prohibited. If such a proposition was to be agreed for EU, it would have an

impact on Carlsbergs sales. Unfortunately for Carlsberg, there are many more propositions,

and therefore it is important to be aware of the alcohol strategy meeting in 2012. (Hansen,

2010)

Many of Carlsberg markets already have limitations in sales, availability and advertising.

Carlsberg describes the legal limitations as high risk factor, as a change in the statutory

demands by itself affects consumer behavior. (Carlsberg, Annual report, 2010)

Excises on alcohol: It has a great impact on the prices of beer and the profit. When theexcises rise, Carlsberg raises prices as excises are regarded as consumer tax. The demand is

price sensitive, and as the prices increase, it affects the demand.

Recently, Russia decided to increase excises on alcohol, hoping that excises would reduce

the heavy drinking. Since Russia is one of Carlsbergs biggest markets, the higher excises

affect Carlsberg a lot and it is hard to predict the future demand as the prices will increase.


Sales rights at big events: In 2012, London hosts the Olympic Games. Heineken,Carlsbergs competitor, was chosen as sponsor for this event. This means Heineken has all

rights regarding sale of beer and cider at official places where alcohol is on the menu.

Depending on which sponsor is chosen it has an impact on the sponsor and their

competitors. Since Heineken was chosen, it is a lost opportunity for Carlsberg, but it also

strengthens Heineken.


10/47



10

Economical

Carlsbergs activities affect the debt and equity which primarily relates to changes in exchange rates

and interest rates.

Exchange rate risk: As an international company, Carlsberg is exposed to exchange raterisk, since most of the revenue comes from foreign companies, which is exchanged into the

functional currency DKK. Such exchange rate fluctuations can have significant impact on

the income statement and the statement of financial position, and therefore exchange rate

risk is a principal financial risk for Carlsberg.

About 22% of the revenue is made in Russia, and therefore the exchange rate EUR/RUB is

crucial for the profit. The exposure to fluctuations in EUR/DKK is considered insignificant

due to Denmarks fixed exchange rate policy towards EUR. (Carlsberg, Annual report,

2010) Below is a table showing the revenue exposure.

Distribution of net revenue, 2010;

Figure 4: Distribution of net revenue, source (Carlsberg, Annual report, 2010)

Interest rates: The most significant interest rate risk relates to debt. The interest rates affectthe loans and therefore are important part of the financial risk. Carlsbergs exposure to an

increase in short-term interest rates is primarily in EUR, GBP and USD and secondarily

DKK. The exposure to medium-and long-term interest rates is primarily in EUR. (Carlsberg,

Annual report, 2010)

Cyclical swings in the economy: The financial crisis has had a negative effect on the beersale. The consumer behaviors are affected by the macro economics. This of course applies to

most beverage companies and companies in general. There is no way for Carlsberg to avoid

such a crisis, but one should instead focus on how to reduce costs to keep making profit in

bad times.


11/47



11

Also the crisis has made the governments look for new places to increase taxes to help

reduce a possible budget deficit, which could lead to higher excises on unhealthy products.

Sociocultural:

Descending beer consuming trend: Such a trend is of course bad for Carlsberg, and it can bedue to several reasons. Trends in social cultural factors are crucial, when looking at which

product types are demanded. E.g. if consumers become more focused on being healthy,

people might start to exclude beer due to the impact on the health.

This figure shows the Danish use of alcohol in different types of beverages:

Danish use of alcohol, 2010

Figure 5; Danish use of alcohol, source (DanishStatistic, 2010)

The figure shows a down sloping trend for beer and a minor increase in the wine

consumption.

Technological

Modernizing production: The external technological factors are assumed low. It is expectedthat people will always drink beer as a beverage, and no technological factor should change

that. Looking at the production of beer, Carlsberg has recently moved brewery to the highly

modern facility in Fredericia, and therefore there should be no concern that Carlsberg will

fall behind in technology.

Environmental

Commodity prices increase: Among commodities, regular barley is a cereal grain used toproduce beer. Therefore the profit margin is very sensitive to price changes in the grain.

Prices could go up e.g. from nature disaster or a bad harvest due to bad weather. This is of


12/47



12

course important to notice as it will influence input prices. Climate changes can make

farmers more worried about losing their harvest, and therefore the prices might rise due to

an extra risk premium.

Aluminum is used to produce the cans, and therefore Carlsbergs production costs are also

sensitive to a rise in aluminum prices. The prices on commodities have been increasing, and

Carlsberg is going to raise sales prices equal to the commodity price raise. The increasing

prices will again affect the consumer behavior, as it is price sensitive.

To reduce the risk of increasing prices, Carlsberg has developed advanced value

management tools, which are supposed to increase profit margin. (Carlsberg, Annual report,

2010)

3.2 Industry analysis

This section evaluates Carlsbergs future revenue potential in the beverage business from the

attractiveness of the business. The analysis is based on Porters five forces model, which describes

the intensity of competition in the brewing industry from the five influencing forces. The

different forces are described separately, and it is estimated whether there are signs of changes

in the forces that will influence Carlsbergs future earning potential.

Enrollment of forces

Competition force Overall assessment Sub factors Attractiveness

Supplier negotiation power Low Many suppliers +

Integration possibilities low +

Commodity exchange market +

Buyers negotiation power Neutral-low High access to substitutes -

Retail stores size power -

Integration possibilities low +

Competition from substitutes High High access to similar products -

Low product change cost -

Threat of new entrants Low Expensive distribution chan. establishment +

High capital requirements +

Brand loyalty to established breweries +


13/47



13

High production costs +

Industry rivalry Medium (increasing) Medium high exit barriers +

Competition on growing markets -

Table 2: Industry attractiveness, Source: own made

Supplier negotiation power: Assessed from (1) supplier dependency (2) opportunity tochange supplier(3) supplier forward integration

1. The suppliers in the brewery business are primarily the farmers producing the malt, hopsand yeast. The duration of these commodities are limited and therefore the farmers have

to sell at some point. This puts them in an unfavorable position, as they depend on the

buyers to buy before the commodities expire.

2. The commodities are traded on the commodity exchange market, so the prices are underpressure from all the suppliers. This means that the price usually will follow the supply.

With a bad harvest, the prices will go up, and with a good harvest the prices go down.

The farmer does not have the option to sell more expensive than others, as Carlsberg will

just buy from other farmers on the exchange market.

Carlsberg has some fixed deals with the suppliers, to reduce prices and risk. This is in

both parties interest, as the farmers wants to be sure they can sell the harvest, and thebreweries get a fixed price which has some advantages. (Carlsberg, Annual report, 2010)

3. Farmers could do some forward integration, meaning they could start their own breweryor buy one. This though is a completely different business from farming or producing

commodities, and includes a risk. It is unlikely that farmers start producing own beer,

and therefore the breweries again have a good position.

Due to the large numbers of suppliers and the conditions around supplying, the supplier negotiation

power is considered low in general.

Buyers negotiation powers3The buyer negotiation power is assessed from: (1) access to substituting products (2)

number of buyers (3) backwards integration

3 Carlsberg does not sell directly to the consumers, but via restaurants and retail stores. The buyers in the brewery

business are divided into two groups; the restaurants and the retail stores. Restaurants cover cafes, bars, hotels andrestaurants. Retail stores cover supermarkets, convenience stores, gas stations etc.


14/47



14

1. It is easy for the buyers to change into other beer brands, as there are several suppliers ofbeer. But for both the restaurants and the retail stores, it might not be easy to eliminate

Carlsbergs products, as Carlsberg has a very good brand in e.g. Denmark.

In other markets, it is assumed easier for buyers to substitute, as Carlsberg are competing

with other strong brands. In Denmark, it is expected that most restaurants and retail

stores sell Carlsberg products, and therefore buyers have to have Carlsberg products in

their beer collection.

Abroad it is assumed that the consumers do not expect restaurants and retail stores have

Carlsberg products, and therefore buyers have increased power. If the prices of

Carlsbergs beergo up, it is easy for a buyer to eliminate, and stick to selling another

brand like Heineken.

2. There are a lot of retail stores and restaurants. If one retail store or restaurant refuses tobuy Carlsberg products, it will not have greater impact on Carlsbergs revenue. But in

Denmark we have COOP, which is the biggest Danish retail store company. They

control many of the Danish stores, Kvickly, Brugsen etc. Since COOP has a big market

share of the retail stores in Denmark, they also have a much greater negotiation power

against Carlsberg. Such retail companies in other countries will also have more power

than single restaurants etc. But again, consumers expect the stores to have Carlsberg

products, so Carlsberg still has the power.

3. For both restaurants and retail stores, brewing is assumed a new area of business andtherefore no previous assets or knowledge can be used in this business, and for this

reason it is hard to start brewing. It is considered very unlikely that buyers will try

backwards integration, as brewing again takes a lot of investments.

The buyer negotiation power is considered neutral to low in general.

Competition from substitute products: (1) access to similar products (2) possibility of achange in consumer behavior(3)product change cost

1. The access to similar products is high. In restaurants and retail stores it is usually easy tofind similar products. Either other types of beer, e.g. discount beer or vine, and spirits.

Due to the financial crisis, people might start to drink discount beer. It is unlikely that


15/47



15

any kind of beverage will substitute beer completely, as people have been drinking beer

for a very long time.

2. Unfortunately it is hard to find information on the consuming behavior of alcohol in thedifferent regions.

3. The cost of changing to another beer brand for the consumer is about zero, as it is easyto pick another beer brand from the shelf or in the bar.

There are many similar products to substitute Carlsberg beer, not only other beer brands but also

similar products as vine and in some degree spirits. Therefore the competition from substitutes is set

to high.

Threat of new entrants: The threat is assessed from the industry entry barriers: (1) access todistribution channels, (2) capital requirements, (3) brand loyalty, (4) production- and

maintenance costs.

1. Established breweries is assumed to have optimized distribution-, administration, stocksystems etc. which is considered hard to establish and therefore hard to compete with.

2. Large investments needed before economies of scale can be reached. E.g. Carlsberg has just moved Danish production to a top modern facility, which can produce relative

much. Entrants will have a hard time keeping such low production costs as Carlsberg.

3. Brand loyalty, often the breweries has fixed deals with supermarkets, restaurants,concerts etc which makes it hard for new entrants to gain market share.

4. Assumed high fixed costs to production and maintenance of facilities, and thereforesignificant capital is needed before production can begin and continue.

The threat of new entrants is considered low in general, and no signs indicate a threat of newentrants.

Industry rivalry: (1) exit barriers (2) market growth1. For larger scale brewing, it is necessary to invest in large facilities and equipment. But

as brewing is relative common, it is assumed that most breweries use the same

equipment and knowledge, and therefore it is considered relative easy to sell brewing

equipment and machines to other breweries, together with workers, knowledge and other


16/47



16

assets etc. Therefore the brewing industry is characterized by low to medium exit

barriers.

2. The rivalry in the growing markets is considered less intense, as the competingbreweries are trying to attract new consumers, and are not only competing for each

others consumers. But as Carlsberg operates in different regions, from low to high

growth, the rivalry can both be low and high.

In the established markets, with relative mature growth, the breweries can only gain

market share when stealing consumers from other breweries so the industry rivalry is

higher in the mature markets.

The industry rivalry is considered medium now, but rising in the future as the growing markets

become more mature and the breweries settle, mainly in the Asian/Eastern European markets.

Part conclusion

The industry is assessed to be generally attractive because of the suppliers low bargaining power

and because threat of potential intruders is low. The future revenue will be based on the growing

markets, mainly Asia due to high growth, but also Eastern Europe. The competition will be low in

the next years, but as the markets mature and the breweries gets settled in the growing markets, the

competition will increase as the breweries try to steal each others consumers.

3.3 Internal analysis

The following provides a value chain- and resource analysis of Carlsberg, with the intention to

cover the brewerys resources and capabilities, which is giving Carlsberg a competitive advantage.

The analysis is based on Porters value chain that indentifies the generic activities that add value to

an organization or Carlsberg. Only the primary activities will be assessed, which are; Inbound

logistics, Operations, Outbound logistics and Marketing & sales. Service is omitted, as it is not

considered as important in this analysis.

In general, Carlsberg has implemented an optimizing plan called The Excellence Program. The

purpose of the program is to optimize areas in the value chain of Carlsberg, and one of the ways to

reduce cost by this program is also to standardize procedures across facilities.


17/47



17

Inbound logistics

The materials are an important part of the production, and it is Carlsbergs policy to have more than

one supplier of commodities and packaging to reduce risks. Carlsberg has a centralized buying

organization, which ensures good volumes and prices, via long term deals with major suppliers. On

markets where such deals are impossible, Carlsberg tries to develop a relationship with the local

farmers to ensure good volume and prices of materials and commodities.

The relationship with suppliers is important to keep production costs down. Carlsbergs

relationship with suppliers is in general assumed good and therefore is a competitive advantage.

Operations

In the operations, Carlsberg try to optimize as part of the Excellence program. The goal is to create

similar conditions in facilities across countries. There is a lot of restructuring going on, and it is

expected to contribute to an optimized production but also reduction in costs. A good example is

closure of the brewery in Valby, which has been replaced by the modernized brewery in Fredericia.

The standardizing is giving an advantage as the costs are reduced and efficiency increases.


Marketing and Sales

Carlsberg has a lot of brand value. This is mainly via commercials, and sponsoring sports events

and concerts etc. The brand value is considered a competitive advantage, as high brand value takes

a lot of capital and time to achieve.

The brand value can give Carlsberg an edge when trying to make deals with buyers, suppliers etc,

compared to some other less known brands.

Outbound logistics

Carlsberg has fixed deals with retail stores, restaurants and buyers in general. This is considered an

advantage as they are assumed to have some advantages when making deals. Furthermore, if one

buyer only sells one of few beers, then Carlsberg can easily deliver many different beers and be the

only seller to the given buyer.


18/47



18

3.4 SWOT analysis

Based on the resultat from the previous analysis, the SWOT matrix sums up Carlsbergs internal

strengths and weaknesses, and the external opportunities and threats.

Strenghts Weaknesses

Economies of scale Modern facilities, optimized production Excellence program Fixed deals with farmers and retail

stores, restaurants etc about delivery

Market leader or a significant player onmost markets

Brand value

Weak or no position on markets in LatinAmerica and Africa.

Profit very exposed to exchange- andinterest rates

Production costs exposed to degree ofharvest success on commodities and

commodities in general

High production costs

Opportunities Threats

Long term growth potential in Russiaand Asia both via acquisitions but also

via GDP growth in China, Russia and

similar countries.

Increased growth in premium segments,especially on the Russian and Chinese

market.

Political threat, especially in Russia Excises due to government restrictions Increased focus on health Global economy development Decline in beer consumption wine

being a substitute, and changes in

consumption pattern in general

Table 3: SWOT matrix

Carlsberg has a lot of strengths and a lot of opportunities, but unfortunately also some weaknesses

and a lot of threats. The strength is mainly Carlsbergs size and position on the markets, but also the

high brand value. As Carlsberg has a big beer portfolio it is almost impossible for buyers not to sell

Carlsbergs products. This gives Carlsberg a lot of power when negotiating with buyers and

suppliers.

The opportunities are mainly in the East, where the markets are rapidly growing and Carlsberg has

the opportunity to gain a good share of the total beer demand if Carlsberg keeps making key


19/47



19

acquisitions on the markets as the ambition states to be the fastest growing global brewing

company.

The threats are unfortunately many. One of the biggest is the excises on beer in Russia, as it affects

future prices and sale. Another threat is the increased focus on health, which could start a new trend

which affects beer sale in a negative way, as the consumption pattern changes.

One weakness is the exposure to foreign currency, as Carlsberg earns most profit in foreign

countries. The profit is partly lower or higher due to exchange rates. Another weakness is the

production costs, which are also partly determined from commodity prices, and this is somewhat

out of Carlsbergs control. Another weakness is that Carlsberg is either very small represented or

not represented at all on the African, American and Latin American markets.

4 Financial analysis

The goal with financial analysis is to analyze the historic profitability, to be able to assess the future

financial situation and potential. Together with the strategic analysis, the financial part is the

fundament when assessing the future performance and the future value of Carlsberg.

Reformulating the balance and income statement, is necessary for the profitability analysis as

numbers from the reformulations are used in the calculations, e.g. to calculate ROIC. Some

calculations and parts of the reformulations are in the appendix, as they take up a lot of space.

Reformulating the equity is not necessary and therefore omitted.

4.1 Reformulated income statement

To be able to calculate the key numbers, e.g. ROIC and free cash flow, it is necessary to reformulate

the income statement. After reformulating, the NOPLAT will appear. This stands for Net operating

profit less adjusted taxes.

NOPLAT represents the total after-tax operating income, generated by Carlsbergs invested capital,

which is available to all financial investors. NOPLAT is used to calculate ROIC and the free cash

flow.


20/47



20

Reformulated income statement (DKK mil.) 2006 2007 2008 2009 2010

Net sales 41.083 44.750 59.944 59.382 60.054

Earnings (EBITDA) 7.189 7.804 10.301 12.556 14.710

Operating profit (EBIT) 3.886 4.835 6.337 8.695 10.000

Operating profi t after taxes (NOPLAT) 2.788 3.497 5.785 6.410 7.576

Profit 1884 2297 2621 3602 5351

Table 4: Reformulated income statement

The statement shows a steady increase in the profit. In 2009 and 2010, the profit is increasing

rapidly, which must be due to the performance of the new breweries, from the acquisition of S&N,

and therefore a sign that the acquisition was a good idea.

4.2 Reformulated balance

Again, to be able to calculate key numbers, the balance has been reformulated. Here the important

number is the invested capital, which is used to calculate many key numbers, including the return

on invested capital, the rate of turnover and the economic profit.

Reformulated balance(DKK mil.) 2006 2007 2008 2009 2010

Net operating assets 56.399 59.485 141.223 132.561 142.240

Net operating liabilities 16.667 18.022 34.034 35.629 38.057

Invested capital 39.732 41.463 107.189 96.932 104.183

Net financial assets 2.053 1.735 2.451 2.005 2.170

Financial liabilities 22.797 23.254 48.521 39.397 36.546

Net financial liabilities 20.744 21.519 46.070 37.392 34.376

Equity 18.987 19.944 60.751 59.489 69.629

Net financial liabilities + Equity 39.731 41.463 106.821 96.881 104.005

Table 5: Reformulated balance

The statement shows an increase in the invested capital, especially in 2008 from the acquisition. In

2009 there is a small drop, due to sales of facilities. The equity triples in 2008, which is from theshare emission to finance the acquisition.

In the next section, key numbers from the reformulated income statement and balance sheet is used

to analyze the historical performance.


21/47



21

8 Historical performance

Understanding Carlsbergs past it is important for forecasting the future. For that reason key

numbers of the historical performance for the last five years are calculated using the reformulated

income statement and balance.

First the return on invested capital is calculated, together with economic profit to analyze

Carlsbergs ability to create value, meaning how well Carlsberg is using the invested capital to

generate returns. The key numbers that will be analyzed are stated below in the figure;

Figure 6: Key number analysis structure, source; own made

Together with ROIC, the economic profit or economic value added is also calculated. The economic

profit measures whether Carlsberg is using its capital more effectively than it could be used in the

capital market, and how much more profit it makes.

For both key number calculations, the WACC is necessary. Therefore the calculated WACC of

5,24% from the valuation part of the assignment, is used.

The return on equity (ROE) is also an important key number, mostly from the shareholder

perspective. ROE shows the profit size in relation to the equity that shareholders put into Carlsberg,

to gain the surplus. ROE should be larger than the interest rates from safe investments like bonds,

otherwise Carlsberg is not a good investment given the extra risk.


22/47



22

2006 2007 2008 2009 2010

Return on Equity 11,4% 13,0% 5,3% 7,0% 8,6%

ROIC 7,0% 8,4% 5,4% 6,6% 7,3%

Economic profit (EVA) 706 1.324 168 1.330 2.117

Table 6: Summary of key numbers

The ROE in 2006 and 2007 is looking relative good. In 2008 it drops significantly, because

Carlsberg made a capital expansion, which tripled equity from ~20.000 mil. to ~ 61.000 mil. This issaid to be the largest capital expansion in Danish history, and it was used to help Carlsberg finance

the acquisition of S&N brewery. (Carlsberg, Annual report, 2008).

In 2009 and 2010, ROE increased which is due to an increase in the net income, which went from

4167 mil. in 2009 to 5960 mil in 2010. Compared to government bonds, Carlsbergs provides a

much better profit which seems to be increasing after the new brewery starts to work fully.

The table shows a ROIC between approximately 5-9%. In 2008 there was a drop in the ROIC,

which is assumed to be due to the acquisition as the invested capital rose from 41.4 in 2007 to 107.2

in 2008, but the NOPLAT did not increase as much. In 2009 NOPLAT is again rising, and the

invested capital is dropping, which together explains the rise in the ROIC. In 2009 and 2010,

Carlsberg seems to be profiting from the acquisition of S&N.

With the WACC and ROIC is calculated, the economic profit (EVA) is easy to calculate. The table

shows a positive EVA for the last five years. This means Carlsberg is creating value from the

invested capital, because the spread , difference in ROIC and WACC, is positive. The drop in

2008 is explained by the acquisition which made invested capital rise from 41.463 mil. in 2007, to

107.189 in 2008. Carlsberg almost destroyed value this year, but looking at the big picture, even

with a negative EVA in 2008, the rise in 2009 and 2010 would compensate.

In 2009 and 2010, EVA increases which is expected to be due to the new brewery that improves

ROIC which then increases EVA for investors.


23/47



23

The ROIC can be further decomposed into operating margin and rate of turnover.

Operating margin shows the relation between revenue and costs. OM expresses the operating result

per transposed DKK in percent, the higher the better.

Rate of turnover shows the relationship between Carlsbergs revenue and the capital invested to

create the revenue, therefore a rate of turnover should be as high as possible, and the higher the

better.

2006 2007 2008 2009 2010

Operating margin (OM) 6,8% 7,8% 9,7% 10,8% 12,6%

Rate of turnover 1,03 1,08 0,56 0,61 0,58

Table 7: Summary of ROIC decomposed into key numbers

The table states an operating margin which is steadily increasing from 6,8% in 2006 to 12,6% in

2010. This tells that Carlsberg is becoming better at earning money for every sale. Reason why is

assumed to be more effective production, e.g. the new modern facility in Fredericia, but also

because of the Excellence program, where optimizing in general is the goal.

The rate of turnover is above one in 2006 and 2007, which is regarded as fine. In 2008 there is a

significant drop, which can be explained by the acquisition increasing invested capital, which

decreases turnover rate. In 2009, the rate is again increasing, but it is important to notice, that the

increase in the rate is not due to an increase in the revenue, as the revenue in 2009 is actually

dropping. The increase in the rate of turnover can be explained from a drop in the invested capital,

which went from 107.189mil. in 2008 to 96.932 in 2009. This is mainly the operating assets

decreasing, e.g. intangible assets and tangible assets.


24/47



24

Without looking at the big picture, it would seem that Carlsberg were improving their rate of

turnover in 2009, where as the increase is due to a drop in operating assets and the rate of turnover

in 2009 is actually not improved compared to 2008. By selling facility assets, with or without

purpose from Carlsberg, the rate goes up, but not from increasing revenue and therefore this is

important to notice. In 2010, the rate drops again, which is again primarily explained from the

facility assets that increase from 96.932 in 2009 to 104.183 in 2010.

It is important to remember, that the acquisition in 2008 might be giving Carlsberg some extra costs

in the beginning, before the facilities are standardized according to Carlsberg and optimized to

reduce costs. This could explain some of the drop in the rate of turnover after the acquisition.

Part conclusion

Carlsberg is showing some good signs, as most of the key numbers are improving. The Economic

profit was positive for the last five years and has a tendency of rising. The return on invested capital

was increasing up to 2008 where there was the acquisition, which made the ROIC drop that single

year. ROIC in 2009 and 2010 shows increasing tendency, this is a good sign as it increases the

spread and therefore the economic profit.

Return on equity was also increasing up until 2008, where it dropped due to the increase in equity.

2009 and 2010 again showed an increase, which is preferable for the shareholders as it states

Carlsberg is increasing the created value per equity.

The operating margin is increasing, which is assumed due to the Excellence programs.

The rate of turnover is increasing after 2008, but this would be due to a drop in the invested capital

and not an increase in the revenue. In general the historical performance shows a steadily growing

tendency, especially after 2008, which is important as this was the acquisition year of S&N and it

simply shows that it was a good acquisition.

6. Forecasting

Forecasting the future income statement and balance is necessary to calculate the future cash flows.

The forecasting will be for each of the three regions, as the markets are in different maturity stages

and therefore also different growth rates. The assumptions and estimations will be based on the

prior strategic section of the assignment, including the section describing the different markets.


25/47



25

The forecasting period will be for future seven years and then a terminal period. A further simple

forecasting is omitted, as a seven year forecast is regarded as sufficient.

It is assumed that the market shares will remain constant for the forecasted period. Another

assumption is that there will be no major acquisitions or sales. The forecasting of the remaining

items will be a percentage of the revenue. See appendix one for the full forecasted income statement

sheet.

6.1 Forecasting income statement

Northern Europe

The base revenue for this region is the 2010, equal to 36.1 bil. DKK. This region is set to weigh

60% of total revenue for the future years.4

The future revenue is expected to be low due to the

economic crisis, the maturity and competition on the markets. Growth in the revenue is not

expected until the ending years of the forecasting for these reasons. The Baltic countries however

are also a part of this region and here the consumption is expected to grow. Carlsbergs 2011

earnings expectations is a low single-digit decline.

There will also be an increase in input costs, which will be mitigated through higher sales prices in

all regions.

Northern Europe 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E Terminal

Revenue (%) -2% -1% 0% 1% 1% 1% 1% 1%

Revenue(bil DKKR) 36.156 35.447 35.096 35.096 35.447 35.802 36.160 36.521 36.886

Table 8: Northern & Western Europe revenue forecast

Eastern Europe

This region is still developing in distribution channels and a growing middle class has a positive

influence on the beer sale. Carlsberg expects a market growth of 2-4% in Russia from 2011. In

2011 the higher input costs will lead to higher prices, but also the increasing taxes will increase

prices and therefore this has a negative impact on the sales, and this has a negative impact on the

revenue. Growth though is expected to resume in 2011, with a midterm average of 3-5%.

4 Revenue in this region was 61,4% of total in 2009, and 60,2% in 2010. As the other growing markets grow, of course

the revenue weighs will change, but for simplicity 60% is kept constant and so will the other ratios be for theforecasting.


26/47



26

The other regions had a positive growth in 2010 and these are expected to continue, e.g. Ukraine

has improved macroeconomic conditions, which increases sales. The growth in Eastern Europe is

expected to be positive in the next years, with relative low growth in the first years, but high growth

in the later years. In 2010 Eastern Europe revenue was 30% of total revenue.

Eastern Europe 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E Terminal

Revenue (%) - 3% 4% 5% 4% 4% 3% 3% 3%

Revenue(bil DKKR) 18.187 18.733 19.482 20.456 21.274 22.125 22.789 23.473 24.177

Table 9: Eastern Europe revenue forecast

Asia

This region includes old, mature Carlsberg markets, but also some new beer markets, among them

China and India. The Asian market is characterized by high density population in cities and a

growing economy. It will continue to grow faster than the rest of the world and is expected to

account for nearly 40% of all global beer consumption in 2015, which is more than Europe and

North America combined. China is expected to have more than 10% GDP growth and India close to

10% as well until 2015.

The beer consuming is in general low on the new markets, but is expected to increase drastically in

the next years, due to rising disposable incomes. In 2010 Asia revenue was only 10 % of total

revenue, but this is expected to increase significantly in the next years.

Asia 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E Terminal

Revenue (%) - 14% 13% 12% 10% 10% 9% 9% 8%

Revenue(bil DKKR) 5.613 6.399 7.231 8.098 8.908 9.799 10.681 11.642 12.574

Table 10: Asia revenue forecast

Net revenue

For the net revenue, the forecasted revenues are added together;

Net re venue 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E Terminal

Revenue growth (%) - 1,0% 1,7% 2,6% 3,3% 3,4% 3,0% 2,7% 1,9%

Net revenue 59.956 60.578 61.621 63.261 65.425 67.724 69.849 71.755 73.171


27/47



27

Table 11: Net revenue

As the table states, the revenue will grow slow in 2011, but will increase in the next years. The

terminal is calculated to 1,9 % growth a year, as it is expected that Carlsberg will get big influence

in Eastern Europe and Asia. The revenue growth is mainly from these two regions, as they are

growing more than Europe. Especially the high expected GDP growth in Asia is a factor for

Carlsbergs terminal revenue.

Production costs

As stated earlier, Carlsberg moved brewing activities from Valby in Copenhagen, to Fredericia. The

new brewery is future proof and expanded to become one of the leading in Europe in terms of

quality and efficiency. The capacity was increased from 2.5 to 4.3 million hectoliters. The

production costs are expected to fall, due to the economies of scale of this new brewery.

Carlsberg also have the Excellence programs, which is a program that was created in 2003. The

program has a special focus on margin improvement, by optimizing the costs including the brewing

structure. By systematically increasing efficiency through the value chain, it is expected that costs

will decrease. Phase II of the program is to standardize functions across countries to further improve

efficiency and decreases costs. (Carlsberg, Annual report, 2008)

With the new acquisitions there are a lot of areas to improve to reduce costs. Due to these reasons,

the production cost is first expected to rise, but shortly after expected to decrease slightly.

Production costs 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E Terminal

Percentage of revenu 43,7% 44,0% 43,8% 43,6% 43,4% 43,2% 43,0% 42,8% 42,8%

Annual change in % 0,3% -0,2% -0,2% -0,2% -0,2% -0,2% -0,2%

Table 12: Production cost forecast

Other operating expenses

Sales and distribution expenses are assumed closely related to revenue and therefore this variable

will be forecasted as a percentage of the revenue. The average for the last five years is -28,7%, but

in 2006 and 2007 costs were above 30% which increases average. In the latest years, the cost of

sales and distribution was between 25% and 28%. The forecasted cost is a little below the average,


28/47



28

as it is expected that costs will drop because of Carlsbergs goal to reduce costs via the Excellence

program.

Sales & dist. costs 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E Terminal

Percentage of reven 27,2% 27,0% 27,0% 27,0% 27,0% 27,0% 27,0% 27,0% 27,0%

Table 13: Sales and distribution forecast

Administrative costs are 6,6 % in 2006, and showing a slightly reducing trend for the next years.

Administration costs are between 6,6% and 5,9% in the last five years. The average is 6,2%, which

will be used as the forecasted value, as costs seem to be more or less constant in the historical view.

Administration costs 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E Terminal

Percentage of revenue 6,0% 6,2% 6,2% 6,2% 6,2% 6,2% 6,2% 6,2% 6,2%

Table 14: Administration cost forecast

Other operating incomes

This item is a small part of the income statement, and includes operating income and expenses.

Mostly it is gains from disposal of real estate property and this is hard to forecast. In the last years it

has been around 0-1%, and the average is 0,7 % revenue.

The forecast of this item will therefore be the average.

Other operating income 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E Terminal


Table 15: Other operating income forecast

Special items

Special items are mainly restructuring costs and other costs, e.g. depreciation of brands and

facilities. This item is not very large portion of the income statement, and in the historical review it

looks very stable. It will be forecasted as a percentage constant of the historical revenue, since it is

hard to know how the future restructuring costs and depreciation will be.

Special items 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E Terminal


Table 16: Special items forecast


29/47



29

Depreciation and amortization

This item will be forecasted as a percentage of the tangible and intangible assets. Since Carlsberg is

a production company, most of the depreciable assets are assumed related to the companys

breweries, in which there are many buildings and a lot of machinery for production.

The intangible assets mainly consist of goodwill and brand value. If these drop, so will the

depreciation. The forecast of depreciation and amortization will be growing slowly with 0,2% per

year, as the assets also grow.

Depreciation & Amortization 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E Terminal

% of intangible+tangible assets 3,9% -4,0% -4,2% -4,4% -4,6% -4,8% -5,0% -5,2% -5,4%Table 17: Forecasted depreciation

Result from associates

This post includes costs and value adjustments in associates. The item has been very constant the

last five years, being 0,2% every year except 2008 where it was 0,1%. Therefore is expected to

continue this way. The forecasted result from associates is set to 0.2% which is also the average.

Result from associates 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E TerminalPercentage of revenue 0,2% 0,2% 0,2% 0,2% 0,2% 0,2% 0,2% 0,2% 0,2%

Table 18: Forecasted result from associates

Financial items

This consists of financial income and expenses. These items are mainly related to interest rates and

exchange rates. As an international company, Carlsberg is exposed to exchange rate risk, since most

of the revenue comes from foreign companies. About 22% of the revenue is made in Russia. Asian

currencies represent 5-10% of operating profit.

Another financial item is the interest rate risk that relates to debt. The interest rates affect the loans

and therefore are important part of the financial items. Carlsberg has different initiatives to

minimize the volatility of the financial items. In 2008 the financial costs more than doubled, which

is mainly due to increase in interest rate costs on loans.


30/47



30

Another factor was the financial instruments that were affected prior to the S&N transaction, which

had influence on costs, but the annual report does not go in detail. The last most important cost was

the exchange rate cost that also increased in 2008. (Carlsberg, Annual report, 2008)

The financial items have been stable, except the costs in 2008 which were doubled due to the

acquisition, but probably also because of the financial crisis. It is hard to predict the future interest

rates and exchange rates. Therefore the financial income will be forecasted as the average of 1,6%

revenue.

The financial costs will be forecasted as 5,0% revenue, which is a a little below the average of 5,5%

revenue. The small correction is made because 2008 was an exceptional year, because of the

enormous acquisition but also the financial crisis, which are extraordinary happenings that wont

appear every year.

Financial income 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E Terminal


Table 19: Forecasted financial income

Financial costs 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E Terminal


Table 20: Forecasted financial costs

Minority shares of result

This item is of course related to the result of the year, and therefore it will be forecasted as a

percentage of the result. It is mainly related with Baltic breweries and Carlsberg Malaysia group.

The average is 13,2%, but 2008 the share for minorities was 18%, and this increases average a lot.

The rest of the years are between 10% and 13,6%, and therefore a percentage of 13 is chosen.

Minority share of result 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E Terminal

Percentage of result 13,0% 13,0% 13,0% 13,0% 13,0% 13,0% 13,0% 13,0% 13,0%

Table 21: Forecasted minority share


31/47



31

Tax

The tax rate is set to 25%, as this is the current tax rate in Denmark, and this is not expected to

change.

Appendix one shows the forecasted income sheet.

6.2 Forecasting of the balance

In this section, the most important items of the balance will be forecasted. There are two items

which is considered most important, as they make out a big part of the operating assets. These are

the intangible assets, 62% of operating assets and the tangible assets, 23% of operating assets. The

remaining items in operating assets and operating liabilities are small and more or less constant and

therefore a forecast of these items is omitted.

Intangible assets

The intangible assets primarily consist of goodwill, 58% in 2010 and brand value 41% in 2010.

The management expects that brand values can be maintained in unlimited time, as they are well

established. (Carlsberg, Annual report, 2010)

The forecasting of brand value will be set to a constant equal to 2010 in the next years.

The goodwill is determined from the cost and the daily value of the assets and liabilities. The

goodwill is allocated to individual cash generating units on the basis of allocation of the daily value

of each of the acquired companies computed on the basis of expected future cash flows to each

company, discounted to present value.

Carlsbergs ambition is to be the fastest growing brewery, and this requires many acquisitions. It is

possible that some acquisitions will decrease goodwill, and as Koller argues, empirical literature

documents how the typical acquisition fails to create value, and therefore the goodwill forecast

should be constant as the current level. The goodwill is also set to a constant equal of 2010 level.

As the intangible assets primarily consist of goodwill and brand value, and they are forecasted as

constant, the intangible assets are also forecasted as constant.


32/47



32

2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E Terminal

Intangible assets 87.813 87.813 87.813 87.813 87.813 87.813 87.813 87.813 87.813

Table 22: Forecasted intangible assets

Tangible assets

The tangible assets are also known as property, plant and equipment (PPE) primarily consists of two

items; Land & Buildings 42% and Technical installations & Machines 42%.

The item Land & building is expected to increase in the next years, as Carlsberg makes acquisitions

consistent with their ambition. At some point it is expected that acquisitions will decrease and

therefore also this item, but not in the near future due to the size of the Eastern and Asian markets.

The item Technical installations and Machines is also expected to increase slightly together with the

acquisitions and natural growth of Carlsberg.

The tangible assets are therefore expected to increase slightly in the next years, consistent with the

acquisitions and the natural growth of the company. The forecasted growth is set to 2% a year.


Tangible assets 32.420 33.068 33.730 34.404 35.092 35.794 36.510 37.240 37.613

Change in percent - 2% 2% 2% 2% 2% 2% 2% 1%

Table 23: Forecasted tangible assets

Invested capital

As stated before, the rest of the items in the balance are not forecasted, so only the tangible and

intangible assets have impact on the invested capital, as the rest of the items are kept constant. The

invested capital is expected to increase slightly in the future years due to a minor increase in the

tangible assets.


IC 104.183 105.225 106.277 107.340 108.413 109.497 110.592 111.698 112.815

% IC 1% 1% 1% 1% 1% 1% 1% 1%

Table 24: Forecasted invested capital


33/47



33

7 Valuation

For valuating Carlsberg, the discounted cash flow (DCF) method is used. It is a method for valuing

future operations. All the future cash flows are estimated and discounted to give their present value.

The sum of all future cash flows together with the continuing value is the net present value. For

discounting the future operations, the weighted average cost of capital is used (WACC), and

therefore the WACC is first calculated in this section.

7.1 Weighted average cost of capital (WACC)

WACC: +

Long term capital structure

The debt to enterprise value and equity to enterprise value is found via the historical development in

the capital structure;

2006 2007 2008 2009 2010 Avg.

Net financial liabilities 20.744 21.519 46.070 37.392 34.376

Market value added 41.411 45.918 26.795 58.835 85.658

Debt 33% 32% 63% 39% 29% 39%

Equity 67% 68% 37% 61% 71% 61%

Table 25: Capital structure

The market value added is calculated from the share price multiplied with the numbers of shares.

See appendix two for elaboration of the calculations. The historical ratios are relative stable, with

the exception of 2008 where the ratio is almost flipped around. The reason is the acquisition of

S&N. The net financial liabilities more than doubled the same year.


34/47



34

The numbers of shares doubled in 2008, from 76 million shares to 153 million. The share price was

significantly reduced due to the crisis, in 2007 the B share price 617 DKK, but in 2008 only 171

DKK.

The debt to value ratio is set to 39% and the equity to value is 61% in the cost of capital calculation.

Required rate of return for debt

The borrowing return rate for Carlsberg equity;

Where;

The risk free rate is set to 3.80% in Denmark, for an approximately 10 year investment in a Danishgovernment bond.

5

The company risk premium is by Fitch rating set to BBB. Moody rates Carlsberg to Baa2.6

Looking

at Reuters corporate bond spread table, BBB and Baa2 is equal, and represents a 10 year risk

premium of 1.59%.7

See appendix three for Reuters spread table. This is a relative low risk

premium and states that the credit market does not regard Carlsberg as being high risk.

The marginal tax is set to 25%, as this is the current in Denmark.

The required rate of return for debt is then:

5The risk free rate is found at www.nasdaqomxnordic.com. The duration is 9.6 years and the yield is 3.80% for a

Danish government bond. Noted 08-04-20116Carlsberg has the ratings on the websitehttp://www.carlsberggroup.com/Investor/debt/Pages/Rating.aspx7

Reuters corporate bond spread tablehttp://www.bondsonline.com/Todays_Market/Corporate_Bond_Spreads.phpThe ratings from Fitch and Moody are last updated 21-02-2011 and 23-02-2011
http://www.carlsberggroup.com/Investor/debt/Pages/Rating.aspxhttp://www.carlsberggroup.com/Investor/debt/Pages/Rating.aspxhttp://www.carlsberggroup.com/Investor/debt/Pages/Rating.aspxhttp://www.bondsonline.com/Todays_Market/Corporate_Bond_Spreads.phphttp://www.bondsonline.com/Todays_Market/Corporate_Bond_Spreads.phphttp://www.bondsonline.com/Todays_Market/Corporate_Bond_Spreads.phphttp://www.bondsonline.com/Todays_Market/Corporate_Bond_Spreads.phphttp://www.carlsberggroup.com/Investor/debt/Pages/Rating.aspx


35/47



35

Required return for equity

Stated as;

According to the Capital assets pricing model (CAPM) a stocks expected return is driven by beta,

which measures how much the stock and market move together. If the beta is less 1, this equals a

stock having less risk compared to the market portfolio. If beta is above 1, the stock has more risk

than the market portfolio. In short, the lower beta, the lower risk. Since beta cannot be directly

observed, it has been estimated using regression. The beta is a raw beta, meaning it could be

improved if compared with the brewing industry, as they have the same operating risks, but this is

omitted. The beta is estimated to 0,292. See appendix four for beta estimation.

The global investor perspective demands a risk premium of 4.5 to 5.5 %. (Koller, 2005) The

expected risk premium is set to 5.5%, because the financial crisis is assumed to have made investors

more risk obverse.

The expected risk premium from investors is

Calculating WACC

Short summarization of the variables;


36/47



36

+

Inserting the variables; WACC= 39%.4,0%

.(1+25%) + 61%

.5,4% = 5,24%

A WACC of 5,24% is considered good, as it is relative low.

7.2 Present value of operations

The continuation value or terminal value is necessary to calculate, as it represents the future cash

flows after the forecasted period. It is calculated as;

The RONIC is calculated from the forecasted NOPLAT in year the terminal period, divided by the

forecasted invested capital in the terminal period;

The growth rate, g, is the difference in NOPLAT in the terminal year and the last year;

Terminal growth rate; = 0,08, which equals 8,0%.

A quick view on the numbers used to calculate the continuing value;

Continuing value

NOPLAT terminal 9.024

Growth terminal 0,8%

RONIC 8,00%

WACC 5,24%

Table 26: Continuing values

The Free Cash Flow is calculated as;


37/47



37

FCF = NOPLAT + depreciationchange in invested capital

FCF 2011E 2012E 2013E 2014E 2015E 2016E 2017E Terminal

NOPLAT 7.505 7.587 7.781 8.076 8.401 8.696 8.954 9.024

+ Depreciation -4.835 -5.105 -5.378 -5.654 -5.933 -6.216 -6.503

- Change in IC 1.042 1.052 1.063 1.073 1.084 1.095 1.106

FCF 11.298 11.639 12.096 12.656 13.250 13.818 14.351 182.915

WACC 5,24% 5,24% 5,24% 5,24% 5,24% 5,24% 5,24% 5,24%

Discount factor 1,00 0,95 0,90 0,86 0,82 0,77 0,74 0,66

Present value of FCF 11.298 11.060 10.921 10.858 10.801 10.704 10.563 121.563Table 27: PV of Free cash flow

The DCF valuation;

Sum of value 76.205

Continuing value 121.563

Value of operations 197.768

Value of excess cash 1.834Enterprise value 199.603

Value of debt 74.603

Equity value 124.999.673.318 = Enterprise value * 1.000.000

Total number shares 152.556.806

Estimated share value 819 DKK

Table 28: Valuation

The estimated share value is 819 DKK. The current share price is 598 DKK, which according tothe calculations makes the share undervalue by 27%. This is a big difference from the current value,

and it should be viewed critical upon. It is important to remember that there is a lot of uncertainty in

the factors that impact the calculated share price. E.g. much of the information used to estimate the

share value comes from Carlsbergs annual reports, in which Carlsberg of course has interest in

presenting itself as good as possible, and this could also be a factor for the difference in the stock

prices. Although there is some uncertainty in the calculated value, it seems as it is a good idea to

buy the stock.


38/47



38

7.3 Sensitivity analysis

The sensitivity analysis covers some of the uncertainty and sensitivity, which is present in the

calculated stock price. The analysis is based on the key numbers found in the valuation section,

these are RONIC and NOPLAT growth. The risk free rate and the market premium are found in the

WACC calculations. All four numbers are important in the valuation.

The table below shows how a percentage change in the different key numbers affects the price. E.g.

a 1% increase in the risk free rate decreases the calculated stock price with 15,74 % and this shows

how sensitive the stock price is to a change in the risk free rate.

Change in %-points

-1 -0,5 0,5 1RONIC (8,0%) -1,47 -0,73 0,73 1,22

NOPLAT growth (0,8%) -6,84 -3,79 4,76 10,87

Riskfree rate (3,8%) 20,76 9,40 -8,55 -15,74

Market premium (5,5%) 5,25 2,48 -2,73 -5,17

Absolut change

-0,1 -0,05 0,05 0,1

Beta (0,292) 10,46% 4,92% -4,89% -9,26%

Table 29: Sensitivity analysis

The table shows, that the most influencing factors are the risk free rate, the NOPLAT growth and

the beta. The risk free rate though, is more certain than the other estimated values. The calculated

beta is a raw beta, meaning it is for Carlsberg in general. It would be possible to calculate a more

precise beta via the risk in the brewing industry. This is omitted, but, if such a beta calculation was

done, it could equal a different beta. As the table states, a beta change affects the stock price a lot.

The NOPLAT growth is big part of the valuation, as it is used in the terminal value, and therefore

the sensitivity is extra important but unfortunately it is high. This simply tells, that a minor over or

underestimate of the future growth, will have big consequences on the stock price.

8. Conclusion

The main purpose of the assignment was to estimate the theoretical value of the Carlsberg B stock

price. The problem was solved using a strategic analysis, a financial analysis, a forecasting and a

final valuation.


39/47



39

The valuation shows a stock price above the current price, about 27% higher and therefore the

conclusion is that the current stock price is undervalued. In the estimated value there are some

uncertainties involved, but still the conclusion is an undervalued current stock price and therefore a

buy is recommended.

Strategic analysis

The strategic analysis showed that Carlsberg has a good position on a big part of the markets.

The strategic analysis covered the most important factors which impact Carlsbergs sale and

revenue. Among some of them were the excises on Alcohol, and the exchange rates, most important

the Ruble-Euro relation, as a 30% of revenue is in Russia. Unfortunately Carlsberg cannot control

these factors, and can only reduce the risk by different initiatives.

Financial analysis

Carlsbergs historical numbers were used to reformulate the income statement and the balance

sheet. The reformulation split the operating assets and financial assets. To be able to calculate the

key numbers and to analyze the historical performance, the reformulating was needed.

After the reformulation, the different value drivers were calculated. The return on invested capital

was between 5% and 9% in the analyzed period, which is above the WACC in most years and

shows that Carlsberg is able to make profit.

The rate of return was very uneven, but this is partly due to the acquisition of Scottish & Newcastle

in 2008. And even though the rate is improving, it is mainly due to sales in operating assets, which

is important to notice.

The economic profit is positive, and especially after 2008 and the acquisition it is rising

significantly. This is important, as it partly shows that Carlsberg is getting advantage of the

acquisition.

In general, it seems that Carlsberg was doing well in the past.


40/47



40

Forecasting

Based on the strategic analysis, the seven year forecast was made. The forecast of the revenue was

decomposed into the three regions, which were forecasted individually, because they are very

different in both size and growth. The production costs were also focused on, as they naturally take

up a big part of the revenue. The forecast of the revenue was overall slow growing in the coming

years, and increasing rapidly in the later years, mainly due to the Eastern European and Asian

potential.

The production costs were forecasted to drop slightly due to the Excellence programs, which focus

on optimizing production and standardizing procedures across facilities.

The forecasting showed that Carlsberg is expected to grow and make profit in the future.

The valuation

The valuation was based on the numbers from the forecasted income statement and balance. The

future free cash flow from operations was calculated and discounted using the WACC as the

discount rate. The WACC was estimated to 5,24%. The growth in NOPLAT was estimated to 0,8%.

Using the numbers, a present value of the net future cash flows was found and divided with the

number of stocks, which equaled a stock price at 819 DKK which is approximately 27% higher than

the current price. The price deviates a lot from the current price, which is due to uncertainty in the

forecasted numbers and other calculated numbers.

The sensitivity analysis showed a very sensitive stock price, to the NOPLAT growth and the beta.

In general the important factors for the valuation are uncertain to some degree, but despite the past

years growth in the share price, it is estimated that Carlsberg is still an attractive long terminvestment at the current price level.


41/47



41

Bibliography

Carlsberg. (2008).Annual report. Carlsberg.

Carlsberg. (2009).Annual report.

Carlsberg. (2010).Annual report.

Koller. (2005). Valuation. McKinsey & Company.

CarlsbergGroup. (2011). Carlsberggroup.com.

Downloaded from http://www.carlsberggroup.com/experience/timeline/Pages/default.aspx

DanishStatistic. (2. july 2010).Denmark Statistics.

Downloaded from http://www.dst.dk/pukora/epub/Nyt/2010/NR309.pdf

EU, H. c. (2006).Health - EU.

Downloaded from http://ec.europa.eu/health-eu/news_alcoholineurope_en.htm

Hansen, P. M. (december 2010).Magasinet RUS.

Downloaded from Politics, EU: http://www.magasinet-

rus.dk/index.php?option=com_content&view=article&id=337:pres-pa-danmark-for-stramning-af-

eus-alkoholpolitik&catid=65:eu&Itemid=114


42/47



42

Appendix overview

1. The full forecasted income statement

2. The capital structure

3. Reuters corporate bond spread table

4. Beta output summary with data from the regression


43/47



43

Appendix 1:2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E Terminal

Nettoomstning 59.956 60.578 61.621 63.261 65.425 67.724 69.849 71.755 73.171

Produktionsomkostninger -26.254 -26.655 -26.990 -27.582 -28.394 -29.257 -30.035 -30.711 -31.317

Bruttoresultat 33.800 33.924 34.631 35.679 37.031 38.467 39.814 41.044 41.854Salgs- og distributionsomkostinger -16.321 -16.356 -16.638 -17.080 -17.665 -18.285 -18.859 -19.374 -19.756

Administrationsomkostninger -3.618 -3.756 -3.821 -3.922 -4.056 -4.199 -4.331 -4.449 -4.537

Andre driftsindtgter, netto 227 424 431 443 458 474 489 502 512

Srlige poster, netto 474 485 493 506 523 542 559 574 585

Resultat af associerede virksomheder 148 121 123 127 131 135 140 144 146

Indtjeningsbidrag (EBITDA) 14.710 14.842 15.220 15.752 16.422 17.134 17.811 18.441 18.805

Af-og nedskrivninger -4.710 -4.835 -5.105 -5.378 -5.654 -5.933 -6.216 -6.503 -6.773

Resultat af primr drift (EBIT) 10.000 10.006 10.116 10.374 10.768 11.201 11.595 11.938 12.032

Skat (af resultat af primr drift) 2.424 2.502 2.529 2.594 2.692 2.800 2.899 2.985 3.008

Resultat af primr drift efter skat (NOPLAT) 7.576 7.505 7.587 7.781 8.076 8.401 8.696 8.954 9.024

Finansielle indtgter 1.085 998 1.015 1.042 1.078 1.116 1.151 1.182 1.205

Finansielle omkostninger -3.240 -3.029 -3.081 -3.163 -3.271 -3.386 -3.492 -3.588 -3.659

Netto finansielle poster -2.155 -2.031 -2.066 -2.121 -2.193 -2.270 -2.342 -2.406 -2.453

Nettofinansielle omkostninger efter skat -1.616 -1.523 -1.549 -1.591 -1.645 -1.703 -1.756 -1.804 -1.868

Koncern resultat 5.960 3.951 3.971 4.069 4.238 4.427 4.598 4.744 4.703

Minoritetsinteressers andel af resultat 609 514 516 529 551 576 598 617 611

rets resultat 5.351 3.437 3.455 3.540 3.687 3.852 4.001 4.127 4.092


44/47


45/47



45

Appendix 3


46/47



46

Appendix 4

SUMMARY OUTPUT

Regression Statistics

Multiple R 0,663778617

R Square 0,440602053

Adjusted R Square 0,43095726

Standard Error 0,044078185

Observations 60

ANOVA

df SS MS F Significance F

Regression 1 0,08875668 0,08875668 45,68289744 7,4383E-09

Residual 58 0,112687412 0,00194289

Total 59 0,201444092

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% ower 95,0 pper

Intercept -0,003196253 0,005690814 -0,5616512 0,576517665 -0,014587655 0,0081951 -0,014588 0,008

X Variable 1 0,292500 0,043276156 6,75891244 7,4383E-09 0,205873112 0,3791264 0,2058731 0,379

NOTE: Appendix continues on next page.


47/47



Appendix 4 continueddata from beta regressionCarlsberg B - Unadjusted price MSCI world price index

Month # UP MSCI PI

1339,5 970,593

5% 3%

2 355,5 1002,421 10% 0%

3 395,5 1007,077 2% 2%

4 402 1030,019 -1% 0%

5 397 1030,021 4% -4%

6 411,5 991,75 2% 0%

7 422 993,238 2% -1%

8 432 986,474 5% 3%

9 456 1019,392 7% 1%

10 490 1030,83 3% 3%

11 507 1060,237 4% 1%

12 528 1068,788 6% 3%

13 561 1100,641 4% 2%

14 585 1128,008 -1% -3%

15 580 1098,529 3% 2%

16 596 1119,265 3% 3%

17 616 1156,221 8% 3%

18 673 1197,884 -1% -1%

19 665 1183,596 6% -4%

20 710 1134,076 5% 0%

21 746 1138,981 -4% 4%

22 720 1181,595 -4% -1%

23 694 1174,769 -9% -3%

24 635 1136,327 -3% 0%

25 617 1131,746 -13% -8%

26 547 1050,762 10% -4%

27 609 1006,473 5% 1%

28 640 1020,426 0% 4%

29 638 1057,661 -29% 0%

30 495,5 1055,762 -14% -9%

31 433,5 967,666 -15% -2%

32376 945,618

19% 2%

33 466,5 961,271 -19% -12%

34 393 860,32 -63% -19%

35 241,75 720,275 -45% -15%

36 167,25 626,898 2% 8%

37 171,25 677,813 6% -9%

38 182 623,068 4% -14%

39 190,25 545,277 20% 11%

40 239 615,667 12% 8%

41 272,5 669,686 18% 7%

42 334 717,801 5% -2%

43 352,5 704,411 7% 7%

44 377,5 760,401 -2% 1%

45 369 764,803 -2% 2%

46 362 782,831 -2% 0%

47 355 782,831 3% 4%

48 367,75 817,406 4% 2%

49 384 832,501 4% -3%

50 398,7 809,925 7% 2%

51 428,9 824,869 7% 6%

52 462,6 874,8 -2% 0%

53 453,3 873,241 2% -10%

54 461,7 790,402 -3% -4%

55 449 756,977 14% 8%

56 520 823,538 9% -3%

57 569,5 799,121 -2% 4%

58 558,5 833,729 6% 3%

59 594 855,368 -9% 1%

60 547 866,619 5% 4%

bachelor afleveringsdagen f rdig

Documents